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SAIC's Growth Slows in Tough Chinese Car Market

SHANGHAI—
SAIC Motor Corp.
600104 1.28%
, China's largest car maker by sales, on Thursday posted a 2.6% rise in 2012 net profit, the slowest growth in four years amid intensifying competition in the world's largest auto market.

The Chinese partner of global auto companies such as
Volkswagen AG
and
General Motors Co.
GM -1.62%
reported net profit for the full year of 20.75 billion yuan, or $3.34 billion, up from 20.22 billion yuan a year earlier. The result was below the 21.57-billion-yuan net-profit forecast of six analysts polled by Dow Jones Newswires.

"As a result of an aggressive capacity expansion, there was cutthroat competition among car makers last year, leading to steep discounts and lower margins," said
Feng Liang,
an analyst at Guodu Securities. He said that sedans built by SAIC and its foreign partners were offered by dealers at a discount of at least 10% last year.

SAIC said it and its joint ventures sold 4.49 million cars last year, up 12% from a year earlier and accounting for more than one-fifth of China's car market. But the company's gross margin on the car-making business fell to 16.3% from 18.8% a year earlier.

Analysts say total inventories of passenger cars nationwide were equal to about two months of sales in the middle of 2012, exceeding the one-and-a-half months that they consider healthy.

Still, some analysts say the worst for auto makers is over. The growth of passenger-car sales is starting to pick up, thanks to the domestic economic recovery, pent-up demand and the fading impact of the removal of a Chinese government-led subsidy for small vehicles.

In the first two months of this year, China's auto sales rose 15% to 3.39 million vehicles, and sales of passenger cars were more robust, with a roughly 20% gain over the same period, according to the semi-official China Association of Automobile Manufacturers.

By contrast, the country's overall auto sales rose 4.3% last year and 2.5% in the previous year.

"This year we expect a 9% growth rate of the car market in China. I think that's a number that most people would agree with," said
Stefan Magirius,
China president at U.K. manufacturing company
GKN
PLC, which supplies drive shafts, axles and chassis to major car makers such as Volkswagen,
BMW AG
BMW -1.13%
and
Audi AG
NSU 0.51%
.

Guodu's Mr. Feng said inventory has dropped to a more reasonable level, with total inventories of passenger cars equal to about 1.1 months of sales. Also, "while sales conditions are improving, manufacturers are refraining from adding new capacities. So, the odds of a reprise of a price war are small this year," he said.

In its earnings report to the Shanghai stock exchange, SAIC also said "the operating environment for auto makers is better than that of 2012," and the company aims to sell 4.9 million vehicles this year.

BOC International Holdings said it expects SAIC to report a 20% rise in first-quarter earnings. BOC had forecast a 2012 net profit of 21.18 billion yuan for the car maker.

Citic Securities
expects net profit at Shanghai-based SAIC to reach 24.79 billion yuan this year, after taking into account a recent recall by Shanghai Volkswagen of about 130,000 vehicles on the mainland.

The recall, to take effect on Tuesday, came after a report from China's powerful state-run television broadcaster alleging problems with the gearbox systems in some of Volkswagen's models. VW and its joint ventures will recall more than 380,000 vehicles due to the problem.

In spite of the slower 2012 profit growth, SAIC still beat its domestic rivals thanks to its strong ties with Volkswagen and GM.